Econ Mystery: Solved

In an interesting opinion piece in Wednesday’s Wall Street Journal by William Galston, he asks “Why did wages flatline?”, and cites Bureau of Labor Statistics that since 2010 hourly wages, corrected for inflation, have risen at only 0.5% per year. Unfortunately, he does not contrast this with what he claims were greater gains in most earlier periods. However, I do believe his thesis that the gains have been smaller in recent years. He also cites falling unemployment, falling unemployment duration, but notes lower employment participation. He then hypothesizes that unions are weaker, the population is aging, and with corporate profits up, managements aren’t sharing gains with workers. Standard progressive fare.

Then there is our President, who asserts that the good jobs have been lost to China. Unfair currency manipulation, government subsidies, theft of intellectual property, all under the auspices of a government taking advantage of US workers has been the villain. Pretty standard reactionary fare.

So where does the truth lie? While everything on both sides has some element of truth, some minor contribution to the problem, the elephant in the room, that no one discusses, is automation and instantaneous global communications. More jobs, especially higher paying manufacturing jobs, have been lost to automation than anyone is talking about. So is protectionism the answer—trade barriers, including tariffs, restrictive quotas, our own currency hijinks? Or is it training and retraining individuals out of work with new and different skills, those now needed by the ever-changing economic landscape?

Simple economic theory teaches comparative advantage, that everyone is better off if each nation does what it is best at, and sells to other similar nations the goods and service in which they excel, and buys what their trading partner excels in. The visible problem is this, however. As a hypothetical (my numbers are not grounded in research, but are not totally fanciful), because Apple manufactures in China, everyone can buy an IPhone for $200 less than if it were manufactured here, and let’s say 4 million of them would be sold per year. That’s good, right? But if they were to manufacture here, there would be an additional 20,000 people employed at an average salary of $25,000 per year plus benefits. This might be offset by less sales of our exported products to China, but let’s not even worry about that. So the employed are better off by $500 million and the buyers collectively are worse off by $800 million. The 20,000 people without jobs hurt more and are more visible, even though the nation as a whole has a net benefit.

So what do we do? The answer has to be to make a meaningful investment in training and retraining. There are many overlapping and inefficient government programs for training, so why not drop them, and use the money elsewhere. Employers know best what skills they need, so let the government reimburse them for training. For example, if a company were to hire a worker to fill a job where he did not have the requisite skills, the government could reimburse the trainee’s pay, one month wages if he was still on the payroll at the end of a year, a second month if he were still employed at the end of a second year, and a third and final month if he was still on the payroll after 36 months. Of course there would have to be safeguards to eliminate the possibility of companies cheating, but that shouldn’t be onerous.

Unions could be required to put a small fraction of union dues paid each month into building up a reserve for re-training laid-off members. Teachers, generally off work in the summer months, could be paid for adult education in those months, to bring up reading and math skills among the educationally-deficient unemployed, who could be incentivized to attend classes by the prospect of losing benefits if they did not attend.

So a good centrist position here is not to cut off our nose to spite our face by dampening trade. Nor is it to rail against “greedy” capitalists, but to invest in our people, upgrading and modernizing their skills. There are always numerous job openings, often going unfilled, because the necessary skills can’t be found.

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10 thoughts on “Econ Mystery: Solved”

Great points. And interesting when you compare it to Trump’s and Sessions’s problems with the H1B visa program. We don’t have enough skilled computer scientists in this country, period. It’s all good and well to say “we’ll starve the H1B visa program so Americans can have those higher paying jobs.” But there aren’t enough trained Americans to take the jobs. The gap between rich and poor America is growing, but the rich side of it isn’t just for bosses. Talented software developers in Silicon Valley with decent experience are being paid well over $200,000/year because that’s the market salary for them…because there aren’t enough of them!

I read years ago that America is a Third World country inside a First World country.
This gives us relatively cheap labor compared to other developed countries.
I think there are those who like it that way. And they make the argument we are not an European socialist country. So the flat-lining of wage growth is not seen as a problem but maybe even a comparative advantage.
Also years ago when I participated in debate in high school there was a topic about the German apprenticeship program and should it be adopted in America. It was not adopted in the last 60 years. Training and educating for jobs is not a focus or a priority in America.

Bert, thanks for the response. From what I know of the German apprenticeship program, I absolutely agree with you. Vocational schools and community 2-year colleges here make an attempt at educating non-college prospects for a decent worklife/career, but they are not fully up to the task. I don’t know what would need to be done in terms of new laws that permitted and/or encouraged these programs, but it is something worthy of some research.

I’m not sure who wrote the comment, but thanks! I agree with you. And it’s not just software developers. During the fracking boom, welders willing to go to North Dakota earned $150,000 per year. We have many jobs with specific skills that aren’t matched by the available American talent pool, but with proper training, could be.

Hi Bob, good points. I liked the Galston piece as well but felt he did not emphasize the importance of improving productivity on growth and hence wage improvement. People can get paid more when the pie is bigger because their labor hours generate more goods and services. I think many of the governments’ (Federal, State, Local) policies over the past several years have put sand in the gears or the economy and that slows/stops productivity growth. There has also been a lot of policy uncertainty (DC gridlock, etc.) that has to affect investment decisions–and investment is a driver of productivity improvement.

But I also wonder if the shift to an increasingly service oriented economy makes productivity gains tougher to come by. Computers help but Facebook hurts!! I have not seen studies that talk to this issue and how it might compare with an aging work force, weaker unions and an unwillingness to share profits with workers, i.e. structural changes in the economy a la Larry Summers.

Your point on training and education is key, however. Productivity can increase by upgrading physical AND human capital. It is concerning but not surprising that it is not particularly successful to try retraining a 55 year old out of work coal miner to write code or succeed at most of the good jobs in the modern economy–even if the jobs were in West Virginia or Kentucky. That problem needs a lot more creative thinking than we have had with the myriad of government programs that are out there.

Importantly, the US is behind the eight ball at present in K-12 educaton as a starting point–a problem even more fundamental than retraining for long run productivity gains, I suspect. Solutions are as always complex but finding ways to get around the teachers’ unions would be a good start and many of the school choice efforts seem to offer a starting point to my naieve eyes.

Challenging topic–thanks for continuing to take this on. The question remains is ther anyone to lead a Centrist charge in 2020–maybe clone Macron.

Bruce–thanks for your thoughtful comments. It’s interesting that on the subject of jobs and training, the two comments I got were from MIT classmates–wonder what that says. Anyway, over-regulation clearly discourages or slows productivity-enhancing investment. And I agree with you on social media–I wonder how many hours of “company” time are chewed up by employees secretly on the personal web. I think the answer to having to think carefully about how to train, is to give companies, who know what skills they need, monetary incentives to train qualified but unskilled and unemployed workers to do the job and then to keep them employed. And although we all sound curmudgeonly, harumphing about the lack of knowledge on the part of K-12 students, I think there is definitely fire, given all the smoke around that issue.

Would it be OK if I cross-posted this article to WriterBeat.com? I’ll be sure to give you complete credit as the aguthor. There is no fee, I’m simply trying to add more content diversity for our community and I liked what you wrote. If “OK” please let me know via email.

AMCTRST THE RE-TRAINING POINT IS SPOT ON. IT SEEMS THAT THE LAST 6 OR MORE PRESIDENTS HAVE BRIEFLY TOUCHED ON YOUR RE-TRAINING ISSUE, BUT WERE NEVER SPECIFIC AS TO THE “HOW TO” ISSUE. THE CONSTANT DIVIDE BETWEEN OUR PROFESSIONAL POLITICIANS AND LOBBYISTS WILL NOT ALLOW ANY MEANINGFUL RESOLVE TO THIS ISSUE UNLESS THE EVERY DAY CITIZENS AND PRIVATE BUSINESS’ BAN TOGETHER AND DEMAND ACTUAL HELP TO SOLVE THIS PROBLEM. JUST ANOTHER PROBLEM THAT WILL BE PROMISED A RESOLUTION “IN TIME” BUT NOT RESOLVED, BUT AGAIN NOT HONORED BY PROFESSIONAL POLITICIANS WHO ARE GOVERNED BY RE-ELECTION CONCERN AND PACT ACCUMULATION. GREAT ADVICE AND A SOUND SOLUTION, BUT AS USUAL THE PEOPLE THAT WE RELY TO SERVE WILL NOT LISTEN AND THEN RESPONSIBLY ACT. AS USUAL THANKS FOR A GREAT BLOG. WAYNE

Thanks, Wayne! Obviously, I agree, and think one of the keys is to let businesses, who know what skills they need and actually do the hiring and employing, design the training. They only get paid for it, though, if the newly trained employee stays on their payroll.